Mixed Signals on Trade Talks; Fed Rate-Cut Hopes
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Bloomberg Audio Studios. Podcasts, radio, news. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. So markets got mixed signals on the U.S.-China trade war today. President Trump said his administration did hold meetings with Chinese officials as recently as this morning. Now, those remarks came after Beijing called reports of negotiations groundless.

At the same time today, the Fed speak revived talk of a rate cut as early as June. And in a moment, we'll be speaking with Stephen Schoenfeld, CEO of Market Vector Indexes. But we begin this morning in Alliance City. Joining me now is David Chow. He is the global market strategist for the Asia-Pacific at Invesco. He is on the line from Singapore.

David, thank you so much for making time to chat with us. I think we can agree that the signals on the trade war were a bit confusing. President Trump saying his team is talking to China, Beijing denying the existence of negotiations. I'm curious, to begin with, how are you understanding this situation? And do you see one side as having a particular advantage at the moment?

I think what we saw from China's reaction is very revealing of how China's approach to the tariff war is very different from all other countries. As you know, China is the only country that retaliated with these reciprocal tariffs.

And the calculation, I think that was coming out of Beijing, was that Trump was going to go after China anyways. And so, less China appear weak in front of its domestic audience, they had to hit back.

And so now I think that the calculus is perhaps less about the economic impact than there are other geopolitical and political considerations that are going on right now. I think from China's side, the calculus is that the tariffs are going to hurt America's economy a lot more than China's economy. And as you know, in China, they have, you know,

The political party controls monetary policy like interest rates, fiscal policy such as infrastructure investment, and also other components of the economy. So I think that the calculus is that China has more tools to respond to these tariffs than other major economies. Are you expecting this trade war to go on for the foreseeable future, or do you think the pain is going to reach a particular threshold soon?

on both sides that would lead to some type of negotiation in the near term? I'm skeptical that we're going to have a near-term trade resolution. I know that the markets are pricing in for one for, and I think it must be very difficult to trade the tariff sentiment. But what, you know, and so if we look back at 2018 or the first trade war, I

Those negotiations took a long time, you know, one plus year for the tariff negotiations to finally conclude. And I think this time around, it's likely as well. I don't expect any kind of near term tariff resolution with China, you know, in the coming months. So Treasury Secretary Besant was saying today the U.S. and South Korea could reach an agreement of understanding on trade as soon as next week.

Presumably that would be step one. Japan has already been in negotiations with the Trump administration. It seems like both Japan and South Korea would be the first countries in the APEC region to come to some type of agreement with the United States. What does that do at the end of the day? Well, I think that makes sense because the U.S. has security.

pacts with both South Korea and Japan, and they've historically been regarded as America's friends, whereas I think the strategy between U.S.-China is a lot different. But I think that certainly opens the door more

for trade deals to be done in the APAC region. And I think that is a very positive development for APAC, since many Northeast Asian economies rely on trade a lot more than other parts of the world. And so this could be a catalyst to galvanize Asian stocks.

So how are you discovering opportunity in markets these days, especially in the Asia Pacific? There's been so much volatility. That represents trading opportunities. I understand that. But if that strategy is not trading per se and you're looking for something to hold on to, whether it's six to nine months, maybe even a year from now, how are you finding opportunity?

Well, I think that we are looking at opportunities in places where the economies are reflating.

specifically Europe with its defense spending announcement in Germany, but also other places. We expect significantly higher government stimulus in infrastructure, defense, and other places. And also in places like China where the government has announced additional measures to boost consumption spending. We expect cuts to the reserve requirement.

and policy rate in China. Other places in Asia, we're starting to see more monetary easing, which is a new thing.

Historically, Asian central banks have waited for the Fed to cut rates before they cut themselves. But we're starting to see that the APAC region is moving more towards boosting liquidity, which should be a boon for markets. So, David, I'm curious as to whether there are particular themes that you may be interested in and whether high technology is one of them.

Sure. We have to remember that the start of this year, there was a very positive development in China with DeepSeek, which was one of the competitors, I think, for some of the AI apps and the belief that

China was catching up to the U.S. when it comes to AI. I'm also a big believer of robotics plus AI, and that's really China's differentiating strategic goal. It's kind of different than what we're seeing in the U.S. Beijing recently hosted this half marathon for robots, and

which is quite interesting. And I think the development of human robots coupled with AI and other high-tech manufacturing is a investment theme that I'm very interested in. You mentioned Beijing there. Are there opportunities you're seeing right now in China overall? Well, I think that, you know, for China, we take a more bullish view on China compared to the street. And I think that

Although the external headwinds for the Chinese economy have been amplified with a tariff risk, but I think we really have to watch what's going on in Beijing in terms of further stimulus that's coming down the pike. And that should be focused on trying to boost consumption in China. Consumption, as you know, is a third propeller of China's economy, and it's been rather weak.

due to things like a more abundant property sector. But I think that's going to start to change as the government focuses more on trying to ramp up this propeller. And we could expect additional

to boost consumption. Things like domestic consumption staples, consumer cyclicals in China, but also things like China H shares on tech. I think that when foreign investors start to show interest back in China, the first place that they allocate capital is actually on H shares and big Chinese tech companies.

So broadly speaking, David, if you're not expecting a near-term resolution to this trade war, and when I say that, I'm kind of highlighting the U.S.-China relationship. Is it safe to say that there is a pretty high risk of a recession still, perhaps extending beyond the U.S. and impacting the global economy? I do think that the risks have increased.

have certainly increased over the past couple of weeks since Liberation Day. And the soft data certainly reflects that in things like consumer expectations for inflation, consumer sentiment souring. Recently, some of the CEOs and earnings calls in the U.S. have come out quite dour about the potential impact of the tariffs.

But that hasn't really translated into the hard data yet. Both things like retail sales and some of the earnings reports that we've seen have been pretty strong and resilient. So I'd say that the recessionary risks have been amplified, but we're not really seeing that yet in the hard data. But overall, the global economy and growth, we've seen the IMF cut

expectations for growth this year because of some of the uncertainties. And I think I'd like to highlight that it's really the uncertainty that's coming out of policymakers in Washington that I think is ultimately what we have to watch out for in terms of the impact on growth. OK, we'll leave it there. David, always a pleasure. Thank you so very much. David Chow, global market strategist for the APAC region at Invesco, joining from Singapore here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Bets are rising on the Fed cutting interest rates sooner than expected as a way of preventing recession. Today, we heard from Fed Governor Chris Waller. He told Bloomberg Television he supports rate cuts in the event aggressive tariff levels do hurt the labor market.

If the tariffs, the large tariffs had stayed on or come back on, then firms are trying to figure out how they're going to absorb some of that cost. And the minute they do that, they're looking at other ways to cut costs. And labor is obviously one way they do that. Meantime, the head of the Cleveland Fed, Beth Hammack, was telling CNBC the central bank could move on rates as early as July if it has clear evidence of the economy's direction.

Now, in the Treasury market today, we had yields down right across the curve, and in turn, those yields at lower levels propelled the equity market higher for a third straight session. For a closer look, I'm joined now by Stephen Schoenfeld. He is the CEO at Market Vector Indexes, joining us from here in New York City. Stephen, thank you so much for making time to chat with us.

How much right now are you betting on the Fed easing before the end of the year? I think the swaps market right now is only pricing in about 16 basis points of easing at the June meeting. Obviously, that's not a full quarter point rate cut. Where do you see the Fed going in the current environment?

Well, Doug, just as you said, the market today is clearly moving past that expectation. We've had some signs of a bottoming in the equity market, but today was the first day that you really saw yields drop across the curve. And so the market is more than smelling it. It heard it from the two Fed governors. And it feels like there's a little bit of a Fed put being put in the market because it's

The equities loved it. And you saw the dollar fall. Foreign currencies go up. Gold rallied, even as the equity market rallied. So that's a break of this kind of strange pattern we've had in the past month or two, where you had U.S. equities, U.S. bonds and the dollar dropping. So I feel that the market is sniffing out some opportunities.

possible easing or at least an insurance policy being articulated by the Fed. It seems painfully clear that markets right now are struggling to weigh the impact of the trade war. Key question is whether the tariffs are going to hurt growth or spur inflation. I think the answer is both potentially. Are you worried about stagflation still?

It's certainly a worry, but we're seeing a lot of concessionary signals from the White House, in some ways even getting ahead of the Chinese, who are still denying that they're in conversations with the White House. But Secretary Besson and the White House are clearly signaling that deals are coming.

It's probably safe to assume now that the numbers that we were most afraid of are sort of peak fear and that we will settle into lower tariffs. The question is, they'll still be high. And the markets are beginning to worry less about it. I'm really encouraged by the fact

that we had three straight days of up movement in the U.S. That's quite rare for this year. Obviously, we're in the middle of earnings season, and a number of companies have already cited macroeconomic uncertainty as one of the things that really clouds the outlook.

Today, we heard from the CEO of Southwest Airlines saying, as far as he's concerned, the recession has already started. Would you think that that is a fair statement or is he going a bit too far? Well, if I was an airline CEO, I'd be pretty worried, not just about consumer sentiment in the U.S., but foreign tourism numbers look like they are going to plummet, not just, you know, from Canada, the bookings are down 70%.

A lot of Europeans are canceling. So if you're in a business like aviation, it could be the case that the recession has started. But you've got plenty of businesses that are demonstrating that they are not as affected by tariffs. Google's results today indicate that. You look at a company like Palantir. Netflix certainly is impervious to tariffs. So it really will vary industry by industry.

But for us at Market Vector, it just reinforces the critical importance of diversification, not just have exposure to the U.S. equity market. So within that umbrella then of diversification, is there a specific strategy that you're taking? Are you apt to become a little bit more defensive? Are you?

hiding out in certain areas of the market right now? So we have a number of indexes that are tracked by ETFs that provide a hedge. We have gold and gold mining indexes. We have crypto and digital asset indexes and also international equities. So you can pick certain countries that are performing better, or you could pick sectors such as defense.

which has been doing incredible. You know, the defense, our defense index is up 34% this year because it's not tied to tariffs. It's tied to government spending. So,

If we had a single watchword for investors, it would be diversify internationally as well as not have as much in the U.S. as you might have had in the past. And then look for sectors, whether it's gold mining or defense sectors.

That can provide diversification when the big U.S. market is dropping. A number of analysts have already soured on the profit outlook due to the risk of a slowdown, whether we want to call it a recession or not.

And we know that the tariff story is going to really confront corporate America with some very difficult challenges. Where are you right now in the overall market in terms of your target for the S&P 500 this year? Yeah, so we don't pick specific targets, but I think what is very telling, Doug, is

is we entered the year and the U.S. was 70% of total world market cap. That's an unprecedented relative weight of the U.S. to the rest of the world. It even surpasses Japan's weight in the world at the peak of the Japanese bubble in the late 80s. It was about 60%. So our view has been to be rebalancing away from U.S. equities. I think

We might have seen the lows of the year in the S&P or we might have another leg down, but certainly things feel more constructive. I wouldn't look for a major drop.

of return in U.S. equities, not after two straight years of 25% return and the U.S. becoming so dominant over the last few years. All you have to do is look at some of the analyst reports from late last year where, you know, people are talking about U.S. exceptionalism. You have to be in the U.S. And that was probably the peak, right? So I think investors are better served to be spreading their equity

allocation across the globe. So to what extent do you believe this trade war initiated by the U.S. has done more, let's not necessarily say permanent damage, but lasting damage to the U.S. brand?

So I wish I didn't feel this way, Doug, but I really do feel that the way the tariffs were rolled out, the incoherence with how they were explained, hearing different explanations, and even now, you know, different views about when, whether, and how they might be rolled back, it has hurt not just the U.S. brand, but the U.S. reputation as a safe haven. We've seen it in treasuries. We've seen it in U.S. equities.

The U.S. has such a large deficit to fund that we have to attract foreign capital. And unfortunately, I think we're going to pay a higher price for it. And I think global asset allocators, whether they're based in Europe or Asia, sovereign wealth funds or big asset managers are

going to be very reluctant to return to the very high allocation levels they had in U.S. equities. Stephen, we'll leave it there on that note. Stephen Schoenfeld, CEO of Market Vector Indexes. Thank you very much, Stephen. Joining us today from New York City here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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